This column revisits the heated debate over international trade, offshoring, and US wages using new data. It says that increased international exchange with low-income countries has depressed US wages. That effect only arose during the 1990s, suggesting a different conclusion about trade, offshoring, and income inequality than the previous round of debate.

Over the last two decades, the US economy experienced a boom in offshoring and a doubling of imports of manufactured goods from low-wage countries. Over this same period, roughly 6 million jobs were lost in manufacturing and income inequality increased sharply.

These parallel developments led many critics of globalisation to conclude that “good” manufacturing jobs were being shipped overseas at the expense of the domestic labour force, putting downward pressure on wages of American workers. Concern over these developments led the US Congress to pass the American Jobs Creation Act of 2004. Yet whether these changes in the US labour market are a result of rising import competition or relocation by multinationals to other countries (known as “offshoring”) is not clear.

In a recent study prepared for the Brookings Institution, Paul Krugman (2008) claims that we will never know. He asks “How can we quantify the actual effect of rising trade on wages?”, and then answers: “The answer, given the current state of the data, is that we can’t.” Yet Krugman suspects that the dramatic increase in manufactured imports from developing countries since the early 1990s has contributed to increasing income inequality.

Earlier studies explained rising inequality as a result of technological change which favours skilled workers, a falling minimum wage, or weaker unions (Autor, Katz and Kearney 2008). Larry Katz and David Autor agree with Krugman, arguing that international trade and offshoring will be increasingly important drivers of wages in the future. They predict that this will be due rapid growth in competition from developing countries (where wages are low) and dramatic reductions in the cost of computer and communications technology.

Trends in employment, wages, offshoring, and trade

In recent research (Ebenstein, Harrison, McMillan and Phillips 2009), my coauthors and I use new data to confirm that globalisation forces have had a bigger impact on US wages than previously believed. We show that while some US workers have been adversely affected by global competition, others have benefited from these changes. We combine data on individual workers with information on international trade and offshoring to measure globalisation’s impact on US wages and employment.

We begin by showing that over the last twenty years, employment in US manufacturing has declined, wage inequality has increased, and the role of international trade has grown. Figure 1 shows the sharp fall in US manufacturing employment between 1979 and 2002. Total manufacturing employment fell from 22 to 17 million during the sample period, with rapid declines at the beginning of the 1980s and in recent years. However, the effects were uneven across different types of workers. For workers without a college degree, there were significant declines in manufacturing employment over the entire period. The opposite was true for workers with a college degree. Within manufacturing, the labour force has become increasingly well educated, as college graduates replaces workers with high school degrees.

Figure 1. US manufacturing employment by education level, 1979-2002

Note: Author’s calculations based on the Current Population Survey’s Outgoing Rotation Group, 1979-2002.

Figure 2 shows the trends in hourly real wages. While wages fell for the least educated workers, they increased for workers with at least some years of college. The biggest wage gains were for manufacturing workers with an advanced degree. The decline in wages for high school dropouts and the steep wage increases at the upper end of the income distribution indicate a sharp increase in wage inequality.

Figure 2. US manufacturing real wages by education level, 1979-2002

Note: Author’s calculations based on the Current Population Survey’s Outgoing Rotation Group, 1979-2002. Earnings weights, equal to the product of CPS sampling weights and hours worked in the prior week, are used in all calculations. Hourly wages are the logarithm of reported hourly earnings for those paid by the hour and the logarithm of usual weekly earnings divided by usual weekly hours. Overtime, tips, and commissions are included in wages, and top-coded wages are imputed by assuming a log-normal distribution for weekly earnings as described by Schmitt (2003). The calculated nominal hourly wage is converted to a real wage using the 2006 CPI and then trimmed to values between $1-100 per hour.

We then ask whether falling manufacturing employment and rising wage inequality are related to trends in offshoring activities and international trade. One measure of the increase in offshoring activities for US companies is the number of workers employed “offshore” by US multinationals (firms which account for most of US manufacturing employment). Figure 3 shows that the number of workers employed by US multinationals in low-income countries nearly doubled over the last 25 years, while such employment in high-income countries remained roughly constant. One implication is that any employment costs at home of offshoring activities abroad are likely to be concentrated in low-income countries (a result our research confirms).

Figure 3. Domestic and foreign employment US-based multinationals

Note: Author’s calculations based on the most comprehensive data available from firm-level surveys of US direct investment abroad, collected each year by the Bureau of Economic Analysis. We compute number of employees hired abroad by counter by year and aggregate them by World Bank country income classifications.

Figure 4 presents a visual summary of increasing international trade for US manufacturing during the sample period. The solid line in Figure 4 plots the ratio of imports to imports plus shipments over time and the dashed line plots the ratio of imports from developing countries to imports plus shipments. Unlike offshoring, the trends in import penetration were already evident throughout the 1980s. Both imports from developed and developing countries increased steadily between 1982 and 2002, with the most dramatic increase occurring for developing countries.

Figure 4. Import penetration

Note: Data from Bernard, Jensen, and Schott. (2006). We aggregated industry-level data using employment weights calculated from the Current Population Survey’s Outgoing Rotation Group, 1979-2002.

Statistical tests for employment impacts of trade and offshoring

Next, we statistically test whether trade and offshoring has forced workers out of the manufacturing sector. We find that there has been a big movement of workers out of sectors with a lot of import competition. We also look for the impact of offshoring on US manufacturing employment, finding small effects on employment that depend on the location of offshore activities. A 10 percentage point increase in offshoring to low-wage countries reduces employment in manufacturing by 0.2% while offshoring to high-wage countries increases employment in manufacturing by 0.8%.

The beneficial effect of offshoring activities in high-income countries by US firms on their home employment is one of the most surprising findings of the study. The surprising positive effect of offshoring to high income countries on US wages is consistent with some new theories developed by Gene Grossman and Esteban Rossi-Hansberg (2008). They argue that offshoring activities can actually increase wages for workers remaining at home by cutting costs for the companies that employ them.

Did the negative effects of international trade and offshoring activities on US wages increase in the 1990s relative to earlier decades? We find that they did, and that the negative impact of offshoring to low-wage countries on both US wages and employment only became important in the 1990s. The wages of older workers appear to have been disproportionately hurt by offshoring activities.

Statistical tests for wage effects of trade and offshoring

We then test for the impact of competition from international trade and offshoring activities on US manufacturing wages. Because the US labour market is very flexible, we argue that most workers can easily move across different industries. Our results show that there is a lot of movement of workers across different industries in response to competition from imports. This means that there is no visible impact of import competition on wages within highly affected industries since those workers may relocate to another industry. However, it is much more difficult to switch occupations. Consequently, we introduce the concept of an occupation-specific measure of offshoring, import competition, and export activity.

Table 1 shows that some occupations experienced enormous increases in exposure to international trade during the sample period. These included shoe machine operators, for whom occupation-specific import penetration increased from 37% in 1983 to 77% in 2002. Table 2 shows those occupations where export activity increased the most. However, many individuals were in occupations where there was no exposure at all. These occupations included teachers, therapists, sales workers, judges, dancers, and many others.

Table 1. Exposure to international trade across selected occupations

1983

2002

Tool and die makers

0.097

0.189

Patternmakers, lay-out workers, and cutters

0.092

0.19

Miscellaneous textile machine operators

0.071

0.192

Miscellaneous precision woodworkers

0.061

0.195

Lathe and turning machine set-up operators

0.109

0.197

Precision assemblers, metal

0.084

0.201

Assemblers

0.1

0.203

Tool and die maker apprentices

0.104

0.204

Knitting, looping, taping, and weaving machine operators

0.046

0.205

Production testers

0.072

0.206

Numerical control machine operators

0.103

0.207

Solderers and brazers

0.094

0.218

Electrical and electronic equipment assemblers

0.09

0.219

Textile cutting machine operators

0.085

0.226

Textile sewing machine operators

0.136

0.304

Shoe repairers

0.182

0.379

Shoe machine operators

0.372

0.774

Table 2. Sectors with large increases in export shares

1983

2002

Assemblers

0.091

0.171

Miscellaneous textile machine operators

0.033

0.171

Winding and twisting machine operators

0.037

0.174

Metal plating machine operators

0.084

0.176

Patternmakers and model makers, metal

0.107

0.177

Lathe and turning machine set-up operators

0.089

0.178

Drilling and boring machine operators

0.112

0.184

Tool programmers, numerical control

0.116

0.185

Lathe and turning machine operators

0.112

0.188

Miscellaneous precision workers

0.118

0.191

Tool and die makers

0.097

0.191

Mechanical engineering technicians

0.126

0.193

Production testers

0.108

0.2

Aerospace Engineers

0.18

0.219

Milling and planing machine operators

0.132

0.219

Precision assemblers, metal

0.152

0.223

Knitting, looping, taping, and weaving machine operators

0.027

0.224

Solderers and brazers

0.105

0.225

Numerical control machine operators

0.116

0.23

Tool and die maker apprentices

0.113

0.232

Electrical and electronic equipment assemblers

0.113

0.241

Shoe machine operators

0.023

0.261

What we find is that a one percentage point increase in occupation-specific import competition is associated with a 0.25 percentage point decline in real wages. While some occupations have experienced no increase in import competition (such as teachers), import competition in some occupations (such as shoe manufacturing) have increased by as much as 40 percentage points. The contrasting experiences of workers in textiles and apparel-related sectors compared to many service sector employees such as teachers helps to explain why some parts of the US economy have been deeply affected by globalisation while others have not.

We also examine the impact of increased offshoring by US multinational firms on wages of workers in the US. We find that when US companies increase their offshoring activities to low-income countries, this hurts US wages, but that more offshoring to high-income countries is associated with an increase in US wages.

Policy implications

There are several policy implications of this research.

Policies designed to help displaced workers should be targeted at occupations, not industries. Since the research shows that some types of workers, such as those who work in shoe manufacturing, have been disproportionately hurt while other types of workers (such as teachers) have been unaffected, trade adjustment assistance needs to be appropriately targeted.

Policies (such as those proposed by the Obama administration) designed to curb the negative effects of offshoring on US jobs need to distinguish between offshoring to rich and poor countries. Since the negative effects are restricted to lowincome destinations, any policies which discourage offshoring in high-income regions (such as Ireland or France) will have the unintended effect of hurting the very workers they are designed to protect.